Wealth gap widens between super rich and rest

Alan Greenspan - the legendary chairman of the United States' Federal Reserve - is the high priest of free market capitalism.

Alan Greenspan was a convert of Ayn Rand's philosophy of Objectivism

As a young man he was even a devotee and acolyte of arch libertarian writer, Ayn Rand.

Keep that pedigree in mind when you consider the striking observation he made in a television interview last summer:

"Our problem basically is that we have a very distorted economy, in the sense that there has been a significant recovery in our limited area of the economy amongst high-income individuals...

"Large banks, who are doing much better and large corporations, whom you point out and everyone is pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labour force, which is in tragic unemployment, long-term unemployment - that is pulling the economy apart. The average of those two is what we are looking at - that they are fundamentally two separate types of economies."

Mr Greenspan is right, of course, and not just about the US. Over the past three decades, the world economy has been reshaped by two mega-trends.

One is a surge in the size and connectedness of international markets.

Widening gap

This has created a burst of global prosperity that has lifted hundreds of millions out of absolute poverty and into the middle class, particularly in the rising Asian power-houses of China and India.

NEWSNIGHT RICH NIGHT Watch Chrystia Freeland's full report on Wednesday 2 February 2011 at 10.30pm on BBC Two, and then afterwards on the BBC iPlayer and Newsnight website.

But even as the global economy has grown overall, within countries, the gap between rich and poor has increased.

This winner-take-all phenomenon has been particularly stark in the US, where, between 2002 and 2007, 65% of all income growth went to the top 1% of the population.

But the divide has also widened in Britain, Canada, Germany and Scandinavia.

It has increased in the booming emerging markets, too - communist China now has a gap between rich and poor as big as that of the laissez-faire US.

This split between the super-rich and everyone else prompted three Citigroup analysts to conclude that "the world is dividing into two blocs - the plutonomy and everyone else".

As they explained in a 2005 report: In a plutonomy there is no such animal as "the US consumer" or "the UK consumer", or indeed the "Russian consumer".

'Small bites'

There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take.

Political and industry leaders gathered in Davos last week

There are the rest, the "non-rich", the multitudinous many, but only accounting for surprisingly small bites of the national pie.

Through my work as a business journalist, I have spent the better part of the past decade shadowing these plutocrats - attending the same exclusive conferences in Europe, conducting interviews over cappuccinos on Martha's Vineyard or in Silicon Valley meeting rooms, observing high-powered dinner parties in Manhattan.

Some of what I have learned is entirely predictable - the rich are, as F Scott Fitzgerald famously noted, "different from you and me".

What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday.

For the most part, today's plutocrats are not a leisured, landed gentry of inherited wealth.

John Stuart Mill's complaint about the super-elite of his era - that, like the Duke of Bedford, they grew rich in their sleep - does not much apply to today's nerdy, workaholic, perpetually jet-lagged plutocrats.

Modern plutocracy

Emmanuel Saez, an award winning economist who is one of the premier students of the super-elite, has found that in 1916, the richest 1% of Americans received only one-fifth of their income from paid work.

In 2004, that figure had tripled, to 60%.

Many of today's plutocrats are the beneficiaries of globalisation. And even those who made their money at home have figured out that to make more they need to embrace the global economy.

As a result, they are becoming a trans-global community of peers who have more in common with one another than with their countrymen back home.

Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today's super-rich are increasingly a nation unto themselves.

One of the places where that nation meets up is in Davos, Switzerland, at the annual meeting of the World Economic Forum (WEF).

But this year, even the WEF, the premier convener of the global super-elite, is worried that income inequality has grown too extreme.

"Economic disparity and global governance failures both influence the evolution of many other global risks and inhibit our capacity to respond effectively to them," the forum's Global Risks report for this year's conference notes.

"In this way, the global risk context in 2011 is defined by a 21 Century paradox: as the world grows together, it is also growing apart."

So, here lies the dilemma. In today's hyper competitive global economy we need our super rich and the innovative companies they create more than ever. But they need us too - as consumers, as employees, as fellow citizens.

But here is the lesson of history. In the long run super elites can only survive in one of two ways - by suppressing dissent, or by sharing the wealth.

I know which one I prefer.